Financial Glossary

Here’s a list of some financial words you may have heard before but just weren’t entirely sure what they meant. If you’re looking for a word that’s not here, email us at [email protected] and we’ll add it to our list.

401(k) – A retirement savings account offered by employers in which they typically provide some form of a match to what you’re saving. You get a nice tax break for your contributions.

403(b) – Same concept as the 401(k) but used only for non-profit organizations such as schools or hospitals.

Annual Percentage Rate (APR) – The interest rate on a loan averaged out for an entire year. Not a true interest rate, because it also includes fees you’ll pay. You’ll see APR with mortgages, car loans, but most commonly with credit cards.

Asset – Very simply, an asset is something you own that has monetary value. We commonly think of assets as cars, jewelry, houses, etc.

Automated Teller Machine (ATM) – As the name indicates, it’s a machine that acts like a bank teller. Primarily it dispenses money. You can use your debit card at an ATM machine to withdraw cash from your bank account. Be careful with ATMs, because you can end up taking out a lot of cash you don’t need to spend.

Automobile Insurance – This is insurance for your vehicle that transfers risk from you to the insurance company and protects you from losses. Car insurance isn’t optional…it’s the law, so make sure you have it.

Liability – This protects your butt in an accident that was your fault. It covers the medical bills of the other people involved as well as the damage to the car.

Collision – A form of insurance that covers costs to repair your vehicle if you’re in an accident. It requires you pay your deductible first.

Comprehensive – Coverage that provides protection against things not covered with collision insurance such as theft, fire, vandalism, etc.

Bankruptcy – A legal process, which forces your creditors (those you owe money to) to “forgive” your debts. Not a pleasant experience that will trash your credit score. Avoid filing for bankruptcy at all costs.

Bond – A type of investment you can get that is essentially you providing a loan to the government or a corporation. The most common types of bonds are from the U.S. Treasury, which are the safest.

Budget – A game plan for your money so you can keep accurate track of how much you have coming in (income) and how much you have going out (expenses). You really need a budget in order to be successful with money.

Cash Advance – A way to borrow cash from your credit card. Unfortunately, there is no grace period from the credit card company charging you interest when you get a cash advance, so avoid this at all costs.

Certificate of Deposit (CD) – A very safe investment option through a local bank. You give a bank money to hold onto for a set amount of time (usually 3, 6, 9, or 12 months), and they pay you a fixed interest rate. If you pull your money out before that timeframe is up, you’ll be hit with penalty fees. It’s a safe investment but usually has a pretty poor return on your money.

Consolidation – A way to bring all your student loan payments together to make one big payment. This is usually a decent idea if you can get a fixed rate and it doesn’t extend the length of your terms. You’re only allowed to consolidate student loans one time, so make it count.

Credit – Another term for debt when someone gives you a credit that you don’t have to pay back immediately. Thus, the term “credit card” – money you use on credit to buy something and pay for it later.

Credit Card – A plastic card that gives you the ability to purchase things and pay for them later. Misuse of a credit card can easily lead to large amounts of debt. Handle with care.

Credit History – A record of borrowed money in the past. Your credit history includes a list of any credit cards, student loans, car loans, etc that you’ve had and how reliable you were to pay them back.

Credit Limit – The maximum amount you will be allowed to charge on a credit card. Keep a low credit limit to avoid temptation to overspend and never go over your credit limit, or you’ll get drilled with fees.

Credit Report – A report card of how well you’ve handled borrowed money. Do you pay your bills on time or are you late? How much debt do you have? The information in your credit report determines your credit score. If you want to borrow money for school, a car, or open a new credit card, lenders will look at your credit report to see how reliable you are.

Credit Score (aka FICO score) – A three-digit number used to summarize your credit report. Lenders look at this number when determining whether or not to loan you money. In addition, more and more cell phone companies, landlords, and employers are checking your credit score now to determine how reliable you are as a person.

Credit Union – Basically a bank but run in a different way. A credit union is owned and operated by a cooperation of members usually organized around a shared profession or interest. For example, there are credit unions for teachers, hospitals, or religious denominations.

Debit Card – A plastic card that is connected to your bank account so when you make a purchase using a debit card, money is subtracted directly from your account. Keep track of your purchases so you don’t spend money you don’t have in your account.

Debt – Money that you owe to another person or company. You typically make monthly payments with interest to repay your debt.

Deductible – An insurance term which is the amount you have to pay first (above your monthly premiums) before you insurance coverage will kick in and pay for damages.

Default – Failure to pay back a debt that you agreed to. For example, if you don’t pay your student loans for nine months, you are considered to be in default. Don’t go into default.

Deferment – Hitting the pause button on repaying your student loans. If you are in a rough financial situation, you can ask your lender for a temporary deferment so you don’t have that payment for a period of time. Do this to avoid going into default.

Dow Jones Industrial Average – A collection of 30 of the largest and most widely traded stocks. This gives people an index of how the overall market is doing. Here’s a list of the 30 companies that make up “the Dow.”

Equity – You’ve probably heard it used in two contexts. With investing, equity is another name for a stock. In the real estate world, equity is basically the percentage of the house you actually own. For example, if you have a house that is worth $100,00 and your loan (mortgage) is for $75,000, that means you have $25,000 equity or own 25%.

FAFSA (Free Application For Federal Student Aid) – Used by the government to determine financial aid needs for college students. It is a form that must be filled out each year and is the largest source of financial aid for college. Go to www.fafsa.ed.gov for more info.

Federal Reserve – Commonly called “The Fed,” it is the central bank for the United States. They control the amount of US currency in the world and distribute money to banks.

Forbearance – Like deferment, it is a pause on having to pay back your student loans. The difference is with forbearance, you still get charged interest while you’re not paying, but with deferment, you don’t get charged that interest. Check with your lender for your options if you’re having a tough time paying.

Foreclosure – A legal process where a lender will force the sale of your house if you no longer pay the mortgage. With this difficult economy, many homes are in foreclosure because people can’t afford their mortgage payment.

Fraud Alert – If you suspect you’re a victim of identity theft, this is step one for you. Contact the three credit bureaus (Experian, Equifax, and TransUnion), and they will put a fraud alert on your credit report.

Grants – Free money given by an organization (usually the government) to help someone with a specific expense (college is a common one). You apply for government grants by filling out the FAFSA form.

Identity Theft – When thieves steal your personal information and pretend to be you, usually for financial gain. They may use your information to open a new credit card account and charge it up, all while pretending to be you. This is becoming extremely common, so protect your personal data.

Income Tax – When you earn an income, you pay a percentage of that to the government in exchange for providing you services such as military protection, police, firefighters, etc. In addition to the federal income tax (for the US government), you may also have to pay state and/or local income taxes. Everyone pays something different, but generally, the more you make, the more they take.

Insurance – You pay an insurance company a premium to transfer risk in case something happened to what you’re insuring (health, life, car, house, etc).

Insurance Premium – What you pay to an insurance company to take on the risk of what you’re insuring. If what you’re insuring is more of a risk for the insurance company, you will pay higher premiums. For example, a brand new 16-year old driver will pay higher premiums than a 40 year-old driver who has never been in an accident.

Interest – The extra amount of money paid when you borrow money. You can pay or earn interest. If you owe money on a student loan, car loan, or credit card, you will pay interest for the privilege of using their money. When you deposit money in a savings account, a bank will typically pay you a small interest rate for the opportunity to borrow your money.

Lease –An agreement to borrow and use an item that belongs to someone else. So if you lease a car, the dealership still owns it but they are letting you use it in exchange for monthly payments. Don’t lease cars…pay cash for them!

Loan – A type of debt. When someone gives you money (or property/possessions) and you agree to pay it back.

Mortgage – The name for a loan on a house. Like any other loan or debt, you make monthly payments plus interest to the lender.

Mutual Fund – A collection of investments that may include stocks, bonds, real estate, or other investments. Although, you may invest in a single mutual fund, that fund consists of several other investments. A great investment choice because there is some level of built-in diversification to a mutual fund.

NASDAQ – An electronic-based stock exchange. Primarily consists of tech-related stocks so they tend to be more volatile, so although the returns/rewards may be greater, the risk is also greater.

New York Stock Exchange (NYSE) – The largest stock exchange in the world where investors buy and sell stocks, mutual funds, and other investments.

Overdraft – When you spend more than what you have in your bank account. Banks nail you with heavy overdraft fees, so make sure to keep good records and avoid this happening to you.

Roth IRA – A retirement savings account with excellent tax benefits. The money you put into a Roth IRA will have already been taxed, so you won’t be taxed on all the growth when you take it out at retirement. This is one of the best retirement investment options for students.

S&P 500 (Standard & Poor’s stock index) – An index that tracks 500 specific stocks (mostly big, major companies). This index is one of the best gauges of how the overall market is doing.

Scholarships – A financial award for college that does not have to be paid back (similar to a grant). Scholarships are typically given out based on need and merit (accomplishments to earn the money).

Secured Debt – A loan in which there is an asset involved and used as collateral. If you get a car loan, the asset (the car) is considered collateral, so if you don’t pay the loan back to the bank, they get to take your car.

Stock – Giving someone part ownership of a company in exchange for a financial investment. One of the most common investment options available. Stocks are then bought and sold through stock exchanges such as the New York Stock Exchange or NASDAQ.

Subsidized Loan – Given out based on financial need but allows the government to pay interest on the loan while you’re in a school. Also kicks in if your loan is on deferment.

Tax-deferred – A temporary break from paying taxes on an investment, but don’t get too excited…Uncle Sam will get his share at some point. Used with 401(k) and Traditional IRA investments. The money you put in is tax-deferred, so you don’t get taxed when you put it in the account, but you do get taxed when you take it out at retirement.

Tax-free – An investment that you don’t have to pay any taxes on. For example, a Roth IRA grows tax-free, so when you take out the money at retirement, you will not pay any taxes on it.

Term Life Insurance – Provides you life insurance for a specific term/length of time. When you get ready to buy life insurance, this is what you want. Avoid cash-value policies such as universal life, whole life, or variable life.

Ticker Symbol – The abbreviation you see in listings of stocks for individual companies. For example, McDonalds ticker symbol is MCD, while the symbol for Wal-Mart is WMT.

Traditional IRA – A retirement savings account that allows you to invest money tax-deferred. So the money goes in tax-free, but you pay taxes on all the growth when you take it out at retirement. That growth will be huge, so this makes the Roth IRA a better investment option in most cases.

Unsecured Debt – A loan in which no asset is involved. Credit card debt is an example of an unsecured debt.

Wall Street – A street in New York City that runs through the financial district and is where the New York Stock Exchange is located.